Bitcoin is embroiled in a civil war — here's one way it can unfold

Bitcoin
is up 250% since last year, but recently it has experienced big
swings in its price.MI

A civil war is taking place in the world of bitcoin,
putting the future of the red-hot cryptocurrency in
question.

Bitcoin is up over 250% since last year, but in the past few
months its price has experienced big swings.

Arthur Hayes, CEO of BitMex, a bitcoin
derivative exchange, told Business Insider he thinks
recent volatility in bitcoin's price reflects the
uncertainty surrounding the outcome of this war,
which will be decided August 1 when crypto-power brokers
determine how the tech that powers the currency will be
structured.

A bitcoin civil war

The ongoing bitcoin battle is connected to
the cryptocurrency's design. According to bitcoin evangelist
Paul McNeal, bitcoin's blockchain network, the technology that
delivers bitcoins, can only process so much information at a
time. To put it in more technical language, the "blocks" that
carry information in the chain are limited in their size to 1
megabyte (MB).

This, McNeal says, was done on purpose to protect the
network from hackers and other cybersecurity threats. But as the
number of people using the cryptocurrency has increased, so too
has the time it takes for transactions to process. This has made
bitcoin transactions more expensive, which is one reason why
merchants have been slow to accept it as a form of payment,
according to Morgan Stanley.

That said, bitcoin faces a chicken and the egg dilemma.
Consumers have limited places to spend their bitcoins and it
appears merchants do not have enough consumers to make it worth
their time to invest the energy and capital to understand and
accept it.

"This blockchain size issue has drawn a battle line between
two main camps," McNeal told Business Insider. "On one side you
have folks, mostly miners, who think the size of "blocks" should
increase because it would be financially lucrative to do so, and
those who want to maintain the status quo - safety and security
of the network."

Bitcoin
themed balloons float in the air during the "Inside Bitcoins: The
Future of Virtual Currency Conference" in New
York.Reuters/Lucas
Jackson

The folks who want to maintain the size of the
blocks are referred to as the "core developers." According
to McNeal, they are the guys who maintain the code and are
responsible for implementing changes when necessary for future
innovation. By doing so they keep the blockchain
stable.

Their view is that an increase in the size of blocks above
the current 1 MB cap would jeopardize the entire network.

As such, they have come up with an alternative solution to
the problem called SegWit. According to reporting by
Bloomberg's Lulu Yilun Chen and Yuji Nakamura, this solution
would move some activity on the bitcoin blockchain to an outside
network.

"But moving data off the blockchain effectively diminishes
the influence of miners, the majority of whom are based in China
and who have invested millions on giant server farms," Chen and
Nakamura wrote.

In order to find middle ground, some "business executives
and miners" created a proposal called SegWit2X, which would move
the threshold for implementing SegWit down to 80% and also allow
for a small increase in the size of blocks on the chain to 2 MB,
according to McNeal.

But "fundamentalists" on both sides of the argument are
holding their position. This could eventually lead to a
split in the bitcoin world, thereby creating more than
one bitcoin currency.

What will happen next?

Arthur Hayes, CEO of
BitMex.Arthur
Hayes

Hayes told Business Insider that a split, or fork, is very
likely.

"Support for SegWit2x has reached levels unseen for
previous solutions," according to Bloomberg with about 85% of
miners reporting they will agree to the new bitcoin
setup.

Those who hold out will either remain with the old
system or adopt their own. When all is said and done, Hayes
thinks there could be up to four different
bitcoin iterations.

As a result, the price of bitcoin will continue to rise and fall
sporadically until the August 1 deadline, according to Hayes. He
expects nervous bitcoin investors to move over to Ethereum, the
popular bitcoin rival. On Wednesday the price of an ether token,
the token powered by the Ethereum blockchain, was up 20%. But
that doesn't mean he's bearish on bitcoin.

"Sure, people are going to get out as a result of this
uncertainty and the price will fall," Hayes said.

"But there are people with billions of dollars of skin in the
game and they will ultimately go with the superior bitcoin
network, and then the market will follow," Hayes concluded.